What will the world be like when oil reaches $10 a barrel? And which companies will thrive in this environment? Ewan Markson-Brown, co-manager of Baillie Gifford Pacific Fund (GB0006063233), thinks this scenario is only 10 years away. And that is why his fund has no exposure to oil and gas production and almost half of its holdings are in technology-focused companies.
"Information is taking over from energy as the most important commodity in the global economy and our lives," he says. "People have been talking about the fourth industrial revolution, but in 30-40 years I think we're going to look back and say that this time was probably the most important period since the Enlightenment. And it will probably be called 'The Information Age'."
Digitalisation and dramatic improvements in computer processing power are driving disruption across a range of sectors as vast amounts of data are created and connected to networks.
"In 2013, we could record an hour of conversation and it would have taken about three hours for a computer to decipher it and turn it into text. Today that same hour, using a graphics processing unit (GPU), takes one minute," he explains. "These GPUs are very good at deep learning and manipulating data and that's what the large internet companies such as Alibaba (BABA:NYQ), Tencent (700:HKG), Google (GOOGL:NSQ) and Amazon (AMZN:NSQ) are investing in very heavily. They take the data, analyse it, find trends and create new products and services. We're just touching the surface at the moment of what this can do."
The fund, which sits within the Investment Association (IA) Asia Pacific excluding Japan Sector, counts both Chinese internet giants Alibaba and Tencent among its 70-stock portfolio. And Mr Markson-Brown believes Asia's young demographics and greater openness to adopting new technologies means in some sectors it is leapfrogging the West.
The electronic payments industry in India is one example. Last autumn, the Indian government deliberately wiped out the value of 86 per cent of the country's cash in circulation overnight in an effort to stamp down on corruption. The result has been an explosion in electronic payments. "There are only about 24m credit cards used in India, which is negligible," Mr Markson-Brown says. "[Mobile payment company] PayTM (a subsidiary of One 97 Communications Ltd (ONEC:NSI)) has a monthly use of 240m people, up from practically nothing 12 months ago. Today you can use your mobile phone to shop almost anywhere where someone else has a mobile phone."
And unlike in China, where the data in electronic payments is owned by internet companies, in India this data tends to be owned by banks. The fund holds Indian banks HDFC Bank (HDFCBANK:NSI) and Indusind Bank (INDUSINDBK:NSI).
Indian companies are also testing fingerprint payment technology, which will make use of India's Aadhaar ID programme. The programme, overseen by the Unique Identification Authority of India, is the world's largest biometric ID system, with a database of the fingerprints and iris scans of more than 1.1bn people.
Baillie Gifford Pacific Fund is also focusing on e-commerce, particularly in China. E-commerce penetration in the country is currently about 13 per cent, says Mr Markson-Brown, but could lead to mass adoption when it reaches "the magic point" of 20 per cent.
"In 2008 in the US, online book penetration was about 20 per cent and in the next five years it doubled; 20 per cent is some kind of magic point for market share - up until then it grows quite slowly," he says. E-commerce costs are likely to drop dramatically too, as drones and autonomous cars enable much cheaper delivery and big data allows warehouses to store exactly what customers want.
"Companies like JD.com (JD:NSQ) (a 4.6 per cent weight in the fund) in Beijing can deliver to you within two hours within a 2 sq km radius because they stock the right products at the right time using big data networks," he says. "Meanwhile offline retailers are being disrupted dramatically and their businesses have to change or they die. We're already starting to see that."
One of the challenges of managing an Asian equity fund is to buy stocks that can deliver sustainable growth and that will still be around in 10 years' time. New technology will make many global sectors obsolete in the coming years, says Mr Markson-Brown.
"We think the same chunks [of the market] are going to disappear in western markets and they're trading at higher multiples," he says. "The growth companies in Asia are really reasonable and people are not looking at the [long-term picture], for example, in the e-commerce story. In five years' time you could double your growth again, the market simply is not pricing that in."
|Ewan Markson-Brown CV
Mr Markson-Brown is an investment manager in the Baillie Gifford emerging markets equity team. Before joining Baillie Gifford in 2013, he was a senior vice-president in emerging markets at PIMCO. He also previously worked at Merrill Lynch and Newton as an Asia Pacific portfolio manager. He graduated with an MA in philosophy, politics and economics from Oxford university in 2000.
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